If you suspect you have negative equity in your home but need to refinance in order to lower your monthly mortgage payments, consider the following options:

What Does it Mean to Have “Negative Equity”?

If your home’s value has dropped below the amount of money you owe on your mortgage, you are in a position of negative equity. Some people refer to this as being “underwater” or “upside down”. Because the housing market has been in such terrible shape, many people are finding out their home no longer appraises for as much as they paid for it -or for as much as they currently owe on their mortgage.

How Do You Know if Your Home is Underwater?

You need a professional appraisal to know for sure if you are in a negative equity situation or if you still have equity in your home. If you have equity in your home, you can  look into conventional refinancing, assuming you have good credit.

How Does Negative Equity Affect Your Lending Status?

While negative equity doesn’t affect your mortgage if you can continue paying your monthly payments, it does disqualify you from conventional equity and loan programs based off equity. This can make it difficult to refinance a mortgage.

What Negative Equity Refinancing Options Are Available?

Since the lending crisis, lenders have been extremely cautious about lending additional money, especially in situations where borrowers have no equity. To qualify for these refinancing options, you need to refinance such that your post-refinance monthly payments are lower than your current monthly payments (in other words, you need the refinance to lower your monthly mortgage payments, not for a cash out). Take a look at the following negative refinancing options:

1.  FHA Streamline Refinance

An FHA streamline refinance is a Federally backed refinance option designed for people who are enduring economic hardship and need to refinance. In order to qualify for an FHA streamline refinance, you must be current on your mortgage payments, not expect to take out any money from the refinance, and you must qualify for or already have an FHA loan. 

2. Home Affordable Refinance Program

If you don’t qualify for an FHA loan, but you are in a negative equity situation (and yet do not owe more than 125% of your home’s worth), you may qualify for a refinance under HARP (Home Affordable Refinance Program). You’ll need to be current on your mortgage payments (and have been for the past year), and will need to already have a loan backed by Freddie Mac of Fannie May. Learn more about HARP.

3. Hardest Hit Fund

You may wish to ask your lender if you qualify for a loan modification, forbearance, or principal reduction under the Hardest Hit Fund, a Federally sponsored program set up to help lenders support those hardest hit by the housing market crisis. Read this summary of the Hardest Hit Fund to learn more about the program.

4. Your Original Lender

If you don’t qualify for any of the Federally backed programs mentioned above, consider talking to your original lender about a bailout refinancing. Because your lender would rather keep you as a paying customer than lose you to default or foreclosure, they may be willing to work out a refinance plan with you, especially if you make a good case for yourself.

Make sure the lender understands how much you need the refinance but still portray yourself as a good customer who will repay the loan. Banks care most about the bottom line, and they are often willing to undergo a manual underwriting to keep a customer-as long as they believe they will make more money in the long run.

Important Steps to Take When Pursuing Negative Equity Financing

You may be shocked to discover you are in a negative equity position. If you are experiencing financial hardships and find you don’t have the equity in your home you assumed you had, do the following as you make financial plans:

• Don’t fall behind on mortgage payments. (Let other bills slide before putting your mortgage at risk, especially since most refinancing programs require you to have been current with mortgage payments for at least the past year.)
• Communicate with your lender. (If you are at risk of falling behind on your mortgage or need to refinance in order to handle your current financial situation, make sure you communicate through options with your lender. Not communicating can lead to problems, whereas your lender may have options available for you that you should consider.)
• Comparison shop for lenders and options. (You may find a new program has been created or that new options have been opened.)